EconPapers    
Economics at your fingertips  
 

Wage Rigidity, Implicit Contracts, Unemployment and Economic Efficiency

David M Newbery () and Joseph Stiglitz

No 67, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Implicit contract theory has been successful in explaining wage rigidity but not unemployment. We argue that the theory has paid insufficient attention to (i) the general equilibrium aspects and (ii) constraints limiting the set of feasible contracts. Implicit, as opposed to explicit contracts, must specify an enforcement mechanism, can only be conditional on observable information, and must be of limited complexity. We first show that in a simple general equilibrium model without these restrictions contracts do not result in unemployment but that the market equilibrium is not constrained Pareto efficient. Our main object is to examine the consequences of these three restrictions. Natural restrictions on enforceability or complexity alone do not lead to unemployment, but limited observability may lead to unemployment. If, however, two or more restrictions apply, then unemployment may result. In particular, we show that periodic unemployment can arise if contracts are of limited complexity and cannot be enforced through third parties.

Keywords: Implicit Contracts; Unemployment; Wage Rigidity (search for similar items in EconPapers)
Date: 1985-06
References: Add references at CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=67 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Wage Rigidity, Implicit Contracts, Unemployment and Economic Efficiency (1987) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:67

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... apers/dp.php?dpno=67

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2019-10-01
Handle: RePEc:cpr:ceprdp:67